Credit Managers' Index for May Recovers, Rebounds to 55.6

The May Credit Managers' Index (CMI) from the National Association of Credit Management (NACM) for May leapt over two percentage points, from 53.3 to 55.6, to a level not recorded since August 2012. The improvement becomes more convincing upon review of the data, and is supported by better consumer confidence numbers and the general enthusiasm greeting the latest housing data.

The index of favorable factors made the transition into the 60s for the first time since November, and is at the highest point in well over a year and a half at 61.6. This was a major breakthrough month and signals the potential for solid gains in subsequent months. Each of the four favorable factors staged recoveries. Sales jumped from 58.3 to 63, which is much higher than it has been in over a year. New credit applications improved from 56.5 to just under the 60 mark at 59.2, another level not seen in a year. Dollar collections jumped as well, from 57.2 to 59.2, a number last seen in December. Finally, amount of credit extended jumped much further into the 60s, from 60.8 to 65. Not since before the recession has this number been so high. "If the willingness to extend credit is surging at this pace, there will be some lofty expectations for the months to come," said NACM Economist Chris Kuehl, PhD. "There would be good reason to question data this optimistic except for the good news percolating in the ranks of the consumer sector, and it is reasonable to assume that this CMI number reflects some of that."

The data from the unfavorable factors is also encouraging and further reinforces the notion that a real rebound is underway. The jump was not quite as spectacular as with the favorable factors, but if the past is prologue there will likely be a bigger response in next month's data. The unfavorable factor index rose above last month's neutral 50 reading to 51.6. Some of its categories experienced a little reversal, but were offset by gains in other segments. Two factors, disputes and filings for bankruptcies, didn't move at all and remained at 48.5 and 56, respectively. Rejections of credit applications fell from 51.6 to 50.8 but, anecdotally, it appears there are far more applications to deal with, which may have affected rejection rates. Accounts placed for collection crept up from 50.1 to 50.6, and dollar amount of customer deductions improved by a larger degree, but remains in the 40s, from 46.8 to 49.6. Dollar amount beyond terms made the most solid gain, jumping out of the 40s from 47 to 54.1, marking the highest level seen in well over two years. "This factor had the most impact, and if there is to be progress, this would be a good place to see it," said Kuehl. "Creditors are clearly getting caught up in a variety of economic sectors."

"The data from this month's CMI looks especially positive, and it would be tempting to start trotting out all kinds of caveats and warnings in order to not be swayed by the stunning improvements," said Kuehl. "But the CMI may simply be presaging much better days ahead."

The Executive Exchange sessions at last month's Credit Congress continued to spark interesting conversation and debate among credit professionals from around the world. The sessions are becoming known for the high levels of interaction fueled by the extended question-and-answer formats that several of the sessions provide.

The International Credit session focused heavily on how to best approach doing business in specific countries. The panel, moderated by Wanda Borges, Esq., Borges & Associates LLC, fielded questions and shared experiences of working across language and cultural barriers, with Latin America generating the most discussion. In nations like Venezuela, where it is extremely difficult to get money out of the country, panelists recommended using confirmed letters of credit because, although more expensive, they mitigate some of the risk. Connecting with customers on a cultural level also was a theme that resonated throughout the discussions. Of note was how much some cultures, like those in Latin America, necessitate a personal relationship not just because of the general or business culture, but because of the financial risk of working with a region's small businesses that can be reduced by knowing a customer well. The session was one of several incorporated into the Credit Congress lineup as part of FCIB's annual International Credit Executives Conference (ICE), held in conjunction with Credit Congress for the first time this year.

The Credit Management session was once again a standing-room-only offering. Of the many topics, questions surrounding how to craft a solid credit application generated a lively discussion. "What don't you like about the application?" was an easy question to ask customers noted Panelist Kyle Grose, CCE, Ferguson Enterprises, Inc. "Once you know what they don't like, you can take that into consideration." Other panelists went over situations involving credit applications, including accepting one that wasn't filled out completely. Panelist Ken Harvey, CCE, of PolyOne Corporation, pointed out that there are things that are much "more significant than whether or not they sign a credit application," such as terms and pricing.

Construction session panelists, meanwhile, jumped immediately into audience questions, including one regarding preliminary notices and state-by-state nuances. This helped to drive home what panelists saw as the immense value of the notice as a tool to not only retain lien rights, but one that is also valuable in reducing DSO.

Among the prevalent themes in the entirely question-and-answer Collections session were using credit risk scores to prioritize collection efforts and identifying the debtors that need heightened levels of attention, and treating collections more like an art form rather than the ham-handed approach of firms that perform collections, while excluding all other credit functions.

Following the conference, many panelists, moderators and attendees applauded the evolution of the Executive Exchange format and how much it brings out the ideas and experiences of conference attendees. Lynnette Warman, Esq., Hunton & Williams LLP, who moderated Legal Issues, noted that the level of engagement and exchange of ideas appear to have increased in each of the last three years. "The session was quite interactive and well-attended. These are always my favorite sessions to participate in each year," said Warman, a frequent speaker at Credit Congress and other NACM events.

- NACM

More stories and photo coverage will be posted on the Credit Congress web pages in the weeks to come. Be sure to keep stopping by!

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Bill Would Count All Small Business Subcontracts toward Federal Goal

A bill introduced this week in the U.S. House of Representatives would aim to enhance opportunities for small businesses by incentivizing prime federal contractors to consider small firms for subcontracts.

Currently, the federal government has a goal of awarding 23% of all prime contract dollars and 35.9% of all subcontracted dollars to small companies. To comply with the subcontracting goal, prime contractors are contractually bound to award an agreed-upon amount of subcontracted dollars to first-tier small business subcontractors. They also encourage their larger subcontractors to use small businesses for contracting at lower tiers. However, the prime contractor only receives credit for its first-tier subcontracts, while the federal government receives credit toward its goal for all tiers of subcontracting.

H.R. 2232, introduced by House Small Business Committee Chairman Sam Graves (R-MO) and dubbed the Make Every Small Business Count Act, would allow the government to grade prime contractors using all levels of subcontracting. While the current law currently ensures that opportunities exist for small businesses at the first tier of contracting, H.R. 2232 would seek to expand opportunities at lower tiers, which Graves said were often the most suitable rungs on the contracting ladder for smaller, developing businesses.

"Small businesses should get a real chance to compete throughout the federal contracting process," Graves said. "The purpose of the federal contracting goal is to ensure small businesses get a fair opportunity, and this bill applies the goal down the line to every subcontract. The change will encourage prime contractors to fully consider the merits of small business bids."

How effective such a bill would be isn't exactly a guarantee, and it attempts to walk a line between getting the American taxpayer the most bang for its buck while expanding opportunities for small businesses. "It's an interesting bill," said Greg Powelson, director of NACM's Secured Transaction Services (STS). "Personally I think the prime should hire the best, most cost-efficient subcontract on behalf of the American people, but, with that said, small business is the engine of the American economy."

The bill's future isn't clear, although Graves has claimed the legislation enjoys support from small and large businesses alike. The bill has three Republican cosponsors in addition to Graves, and another cosponsor, Rep. Scott Peters of California, a Democrat.

- Jacob Barron, CICP, NACM staff writer

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Trade Deficit Widens in April

By March, the U.S. trade gap had narrowed to its lowest point in three years. Granted, that can be a double-edged sword. On one hand, it could represent lessened reliance on other nations for goods while, on the other hand, lower demand from consumers for products in general. The April statistics released by the Department of Commerce (DOC) this week suggested a different situation, one where the trade gap grew by a near double-digit percentage.

DOC noted that $187.4 billion in exports were recorded in April, good for a $40.3 billion trade deficit for the period and an 8.5% trade gap increase compared to March. Some of the notable categories included capital goods ($900 million in exports, but slightly more in imports) and automotive vehicles/parts ($600 million in exports and imports).

DOC believed the deficit was fueled by a return of consumer demand for foreign-made products. The deficit was not, however, fueled by petroleum purchases. Because of shale and natural gas production increases domestically, among other factors, petroleum imports in April dipped to their lowest point since late 2010, according to the release. In recent years, a surge in the trade deficit would often have been triggered by increaseed levels and/or prices in that often volatile sector.

Unsurprisingly, the largest bilateral trade deficit for the U.S. is with China, registering at $24.5 billion in April and $91.5 billion so far in 2013, not seasonally-adjusted. Moreover, with China showing less strength from a consumption perspective, the potential for future decreases in U.S. exports to the Asian powerhouse looms large. Japan, Mexico, Germany and Saudi Arabia round out the top five nations where the U.S. reports the largest deficits.

- Brian Shappell, CBA, CICP, NACM staff writer

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Despite Deficit, April Exports Record Second-Highest Level Ever

While the U.S. continues to experience trade imbalances, as evidenced by the above report on April's trade deficit, exports continue to be a statistical bright spot, nearly setting a new all-time record during the same period. American businesses exported $187.4 billion worth of goods and services in April 2013, marking the second-highest total ever recorded after the $188.7 billion figure in December 2012.

Over the last 12 months, exports of goods and services totaled $2.2 trillion, which is 41% above the level of exports in 2009. Over the same period, exports have grown at an annualized rate of 10.8% in comparison with figures from four years ago. "America has the best workers, products and services in the world, and I am pleased that companies across the country are taking advantage of global business opportunities," said Export-Import Bank Chairman and President Fred Hochberg. "Ex-Im Bank remains committed to helping our nation's business owners grow their sales and create jobs through exports."

On a country-by-country basis, Panama continues to be the biggest gainer among "major export markets," defined as markets with at least $6 billion in annual imports of U.S. goods. The Latin American nation, with whom the U.S. signed a Free Trade Agreement (FTA) in 2007, has registered a 30% annualized increase in U.S. goods purchases when compared to 2009, the highest of any major export market.

"These numbers highlight the strong focus President Obama has placed on increasing our nation's exports and helping U.S. businesses remain globally competitive," said Hochberg, referring partially to the president's National Exporting Initiative (NEI). The initiative has involved numerous efforts to get more businesses exporting, including partnerships between federal groups, such as the Commerce Department, and other private exporting supporters, like FCIB, which signed a memorandum of understanding (MOU) with the Commerce Department's International Trade Administration (ITA) last month.

New for 2013, language and state laws have been updated throughout the entire volume including:

Chapter on Personal Property Liens

Chapter on Trust Funds

Chapters on Liens and Bonds

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Watch for future updates of volumes I, II and IV.

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Municipal Bankruptcy Roundup: When One Door Closes...

As what was once the largest municipal bankruptcy filing case (by dollar value) in U.S. history appears to be winding down, another marquee city continues to teeter on the brink of a filing that could shine the brightest light on the Chapter 9 filing option to date.

Jefferson County, Alabama officials and legal representatives reportedly have agreed with a group of creditors, including JPMorgan Chase, over the massive sewer renovation project-fueled debt that left the municipality financially crippled. Various secured creditors will reportedly take a 20%-40% cut of what the county owes them. Insurers could be out as much as 50%. Despite what appeared to be significant mismanagement of the sewer system and financial collections related to it, the county will likely continue to control such operations, as ruled in previous bankruptcy court hearings.

Jefferson County Commissioners voted 4-1 in November 2010 to file for Chapter 9, with the apparent support of Alabama Gov. Robert Bentley. The Chapter 9 filing listed the county's debts in excess of $4 billion, with most stemming from a sewer system retrofit that turned into a massive and unexpected drain of financial resources. The debt was nearly double the previous record, but has since been outdone by Stockton, California, which filed Chapter 9 in June 2012.

This is at least the third time in the last two years that a settlement was agreed upon well after the Chapter 9 court process started. In others, the filing essentially forced public employees and pension-holders back to the negotiating table. It raises the question of whether more debt-saddled municipalities will look to Chapter 9 as a new strategy to garner negotiating power, be it with suppliers or labor representatives.

The topic of municipal bankruptcy has been gaining traction for the last three years during NACM's Credit Congress. Bob Bernstein, Esq., Bernstein Law Firm PC and conference panelist, told attendees in Las Vegas last month to not disregard stories of municipal bankruptcy just because they're not yet prevalent in much of the country. "They're coming. Get ready," Bernstein warned of the potential wave. He added that the rules of Chapter 9 are very different for creditors than Chapter 11, complicating the process for those seeking recovery.

Meanwhile, Bruce Nathan, Esq., Lowenstein Sandler LLP, noted during the conference that all eyes are, or at least should be, on Detroit right now given its significant problems. Nathan predicts that because the value in play and the name-recognition as a first-level U.S. city, a potential Detroit filing could be the biggest newsmaker in Chapter 9 to date.

Newly-appointed Detroit Emergency Manager Kevyn Orr, who has extensive bankruptcy experience, is currently in a race against time to cut debt before default and eventual insolvency will essentially force the city into a Chapter 9 filing. Some see it as unavoidable given the deep problems with the falling tax base, as well as retirement and health care costs. Orr reportedly has made it known that he plans to file as early as this summer if more than $15 billion in long-term debt can't be renegotiated with various creditors.